Question

EXCEL CASE: INDIRECT SUBSIDIARY CONTROL

Highpoint owns a 95 percent majority voting interest in Middlebury. In turn, Middlebury owns an 80 percent majority voting interest in Lowton. In the current year, each firm reports the following income and dividends. Separate Company income figures do not include any investment or dividend income.

	Separate Company Income	Dividends Declared
Highpoint	$425,000	$200,000
Middlebury	340,000	150,000
Lowton	250,000	75,000

In addition, in computing its income on a full accrual basis, Middlebury’s acquisition of Lowton necessitates excess acquisition-date fair value over book value amortizations of $25,000 per year. Similarly, Highpoint’s acquisition of Middlebury requires $20,000 of excess fair-value amortizations.

Required

Prepare an Excel spreadsheet that computes the following:

1. Middlebury’s net income including its equity in Lowton earnings.

2. Highpoint’s net income including its equity in Middlebury’s total earnings.

3. Total entity net income for the three companies.

4. Net income attributable to the noncontrolling interests.

5. Difference between these elements:

   • Highpoint’s net income.

   • Total entity net income for the three companies less net income attributable to the noncontrolling interests of the total entity.

     (Hint: The difference between these two amounts should be zero.)

Answer 1

Answer-1:

| $ Company Middlebury's operating income Equity income from company Lowton Excess amortization Company Middlebury's net income 340,000 180,000 (20,000) 500,000 $

Working Note:

$ Company Lowton's operating income Excess amortization Accrual based income Company Middlebury's ownership Equity income from company Lowton 250,000 (25,000) 225,000 80% 180,000 $

Answer-2:

$ Company Highpoint's reported income Equity earnings from Middlebury and Lowton Company Highpoint's net income 425,000 475,000 900,000 $

Working Note:

$ Company Middlebury's net income Company Highpoint's ownership Company Highpoint's share of income 500,000 95% 475,000

Answer-3:

$ 425,000 340,000 250,000 $ 1,015,000 Operating income: Company Highpoint Company Lowton Company Middlebury Excess amortization Company Lowton Company Middlebury Consolidated net income 20,000 25,000 (45,000) 970,000 $

Answer-4:

$ NCI of company Middlebury ($500,000*5%) NCI of company Lowton ($225,000* 20%) Total NCI of subsidiaries 25,000 45,000 70,000